Volatility Insights: Cboe Global Markets (BATS: CBOE) Introduces The Cboe S&P 500 Dispersion Index (DSPX)

Across the universe of concepts used to understand and fully develop a trading strategy, volatility ranks among the highest. In the most basic sense, volatility is a measure of risk and uncertainty. When a trader asks "How much will my equity curve whip up and down?" they are intuitively producing a question about volatility. Under that lens, volatility is to be curtailed, controlled and managed (although there is perhaps some wisdom in learning how to benefit from it as well).

For many years, the Cboe Volatility Index® (VIX® Index) has been the leading proxy for market volatility. Now, the creators of the VIX have introduced a new measure of volatility, and traders around the world may want to take note.

Cboe Global Markets CBOE, the premier derivatives and securities exchange network globally, in collaboration with S&P Dow Jones Indices (S&P DJI), the preeminent index provider worldwide, launched the Cboe S&P 500 Dispersion Index (DSPX) on Wednesday, September 27. This innovative index, jointly developed by Cboe Labs – the innovation arm of the company – and S&P DJI, is the newest addition to Cboe’s volatility index suite, designed to offer deeper insights into U.S. equity market volatility.

Dispersion, an essential metric for market participants, allows for a clearer view of potential portfolio diversification opportunities. Dispersion strategies enable investors to model the impact of company-specific risk on a portfolio by measuring the variability of volatilities for single-name stocks relative to the volatility of the index itself.

The DSPX Index, in particular, provides investors with valuable insights into how the S&P 500 Index, one of the largest and most actively traded indices globally, moves concerning the constituent companies within the index – comprising 500 of the largest publicly listed companies in the U.S. – over the next 30 calendar days. Similar to the methodology employed for the Cboe Volatility Index® (VIX® Index), the calculation for the DSPX Index is derived from prices of S&P 500® Index options (SPX) and the single stock options of the S&P 500 Index’s constituent companies.

Rob Hocking, Senior Vice President and Head of Product Innovation at Cboe, highlighted the organization's dedication to pioneering product innovation in the volatility space. Cboe has been a trailblazer since the creation of the VIX Index 30 years ago, transforming volatility trading. The new Cboe S&P 500 Dispersion Index is anticipated to provide investors with an enhanced view of market volatility, complementing the existing volatility indices in the product suite. Moreover, the potential introduction of exchange-listed futures on this index is expected to facilitate broader access, allowing more investors to utilize dispersion trading strategies.

Tim Edwards, Global Head of Index Investment Strategy at S&P Dow Jones Indices, emphasized the limitations of market volatility indices and how DSPX expands this perspective. Market participants will now have an additional tool to understand diversification opportunities and risks within the world’s most liquid equity benchmark.

Cboe Labs is actively planning to develop a futures product based on the DSPX Index for listing on Cboe Futures Exchange (CFE), subject to regulatory review. This move could enable investors to manage their exposure, express views on SPX dispersion, or transfer risk between SPX options and options based on the underlying S&P 500 Index constituents.

In a bid to further elucidate the potential benefits of dispersion trading, Cboe and S&P DJI hosted a webinar on the new DSPX Index on Wednesday, October 4, and you can watch the replay here. Additionally, the DSPX Index will be a prominent topic for discussion at Cboe’s Global Risk Management Conference (RMC), scheduled from October 17-20, 2023, in Austin, Texas, showcasing its importance in the realm of risk management and trading strategies.

To learn more about RMC and delve into the comprehensive insights presented by the new DSPX Index, visit the conference website. The launch of this index marks a significant stride towards a deeper understanding of volatility, providing investors with a vital tool to navigate the complex world of trading and risk management.

Featured photo by Tyler Prahm on Unsplash.

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